The government has not spelt out the details of the unresolved issues over which it opted out of RCEP, but it is evident that these emerged out of the experience we had from the 16 free trade agreements entered in the past.
"We, the Heads of State/Government of the Member States of the Association of Southeast Asian Nations (ASEAN) – Australia, China, Japan, Korea and New Zealand, met virtually on 15 November 2020, on the occasion of the 4th RCEP Summit. We were pleased to witness the signing of the RCEP Agreement..." read the statement issued after the signing of the trade agreement, the Regional Comprehensive Economic Partnership (RCEP).
This brought to closure a process which had commenced in 2012. The signing of RCEP triggered a wave of hand-wringing among academics and economists in India -- Have we missed the bus? Will we be out of the global value chain? Is it an admission of defeat?
It would be worthwhile to pause and recall the statement issued in November 2019 when Indian did opt out -- "India has significant outstanding issues which remain unresolved."
While the government has not spelt out the details of the unresolved issues, it is evident that these were issues which had emerged out of the experience we had from the 16 free trade agreements entered in the past.
The India-ASEAN free trade agreement, the biggest of the FTA's witnessed a trade deficit which rose from $5 billion in 2011 to $22 billion in 2019; in the same period, the India-Japan agreement saw deficit increase from $4 billion to $8 billion and the India-South Korea from $8 billion to $12 billion. As the NITI Aayog paper (A Note on Free Trade Agreements and their Costs) pointed out, India’s exports to FTA countries have not outperformed overall export growth or exports to the rest of the world. Only about 22 percent of exports are to the FTA partner countries. So, while undoubtedly exports are essential and necessary, FTA's have not entirely served that purpose.
On the contrary, imports through the FTA route have increased; nearly 30-35 percent of all imports are from FTA partners with a corresponding cost in terms of revenue impact being in the region of about Rs 65,000 crore for 2019-20. This, apart from the damage which imports at preferential rates of duty had caused to the domestic industry.
India has FTAs with 13 of the 15 countries in the RCEP grouping -including and what is constantly overlooked, with even China. The Asia-Pacific Trade Agreement (APTA), a grouping of seven countries has China as a member. In this regard the PIB release issued on September 12, 2016 after the Cabinet had approved the exchange of tariff concessions on Margin of Preference (MoP) basis to APTA partners makes interesting reading.
The press statement inter-alia states: "The third round, with respect to all Participating States, cumulatively covered concessions on 4,270 products with MoP of 27.2 percent. The Cabinet approved India’s offer 28.01 percent of dutiable national tariff lines (ie 3142 lines in HS2012 at 8-digit) with an average MoP of 33.45 percent."
MoP, for the uninitiated, is the difference between the most-favoured nation rate of duty (the import duty rate which is applied to all countries) and the preferential rate of duty. So, China with whom we have a trade deficit in excess of $55 billion has access at preferential rate for more than 2,000 product lines. And negotiations with Australia and New Zealand for finalising a FTA are ongoing. Thus, we can continue to exploit the FTA route and more importantly renegotiate to iron out issues.
Apart from the 16 FTA’s, India has dramatically relaxed warehousing provisions- regulations are in place which permits duty free import of goods for in-bond manufacture and export or domestic clearance. Several multi-nationals have moved in under this scheme. SEZ’s and EOU’s which similarly permit duty free imports for exports are still in existence. Further, India is signatory to the WTO Trade Facilitation Agreement (TFA). These are commitments given to ensure speedy clearance of imported goods, to simplify processes. They aim at positive integration between countries. The fear of not being part of the global value chain and the grim consequences painted, are grossly exaggerated.
As has been pointed out the share of manufacturing in India’s GDP has remained stagnant at around 16% of GDP (having fallen from 19% of GDP post-1991). A vibrant domestic manufacturing sector is essential for a country to grow-in an ideal situation it should be in excess of 26% of GDP. We should strengthen our domestic industry by addressing the constraints which have hampered their growth. As per the Global Competitive Index for 2019-20 published by the World Economic Forum, India figures 68 out of 141 countries. Out of the 15 members in RCEP, 12 are ahead of India in the rankings.
We would need to introspect as to how we are to make our exports competitive- how to create the necessary comparative advantage. While our domestic industry needs protection, protectionism is not the answer. Industry specific, calibrated response with unambiguous sunset clauses should be the way forward.
We should be acutely aware of the fact that RCEP is China driven. And we should not forget that in an extraordinary show of concern, the RCEP countries have issued a statement keeping the door open for accession by India. Geo-political considerations may have prompted this - Australia and Japan would very much like India to act as a counter-poise to China.
So, if unresolved issues remained and our experience with FTA’s was not satisfactory, it made sense not to rush into a monster trade agreement. We should wait and watch how RCEP pans out and when India’s concerns are addressed, consider joining-not before that.
The author of this article is Najib Shah, chairman (retired) Central Board of Indirect Taxes & Customs. Views are personal.
First Published: IST